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Thursday, December 10, 2009


The long-term neglect of agriculture as reflected in the falling real investment, rising input costs and inadequately remunerative prices lead to fall in agricultural production vis-à-vis requirements. Despite spectacular expansion of bank branch network since 1969, a substantial proportion of rural households still remain outside the coverage of the formal banking system. Cumulatively, the sharply declining farm income is leading to suicides by farmers. Amidst the crisis, what remained as eternal is farming community’s desperate search for fresh credit for the ensuing season. The current agrarian crisis thus, calls for radical policy alternatives. Against this backdrop, this article examines the need for effective delivery of credit at an affordable cost to the vast sections of disadvantaged and low-income groups who tend to be excluded from the formal banking channel and argues for constituting a new pan India bank for rural credit by transferring the existing rural branches of Public Sector Banks (PSBs) and Regional Rural Banks (RRBs) to it to serve the needs of rural population with a totally new culture. For, such State intervention in the form of ‘capitalist guided market economy’ alone can ensure ‘inclusive growth’

      With the advent of economic reforms, India has been witnessing a phenomenal growth in its economy. The GDP, at factor cost in 1993-94 prices, has increased from Rs. 4,01,100 cr as on 1980-81 to Rs. 15,29,400 cr by 2004-05.1 The GDP at current market prices as projected by the Central Statistical Organisation is Rs. 46,93,602 cr in 2007-08, and at factor cost at constant 1999-2000 prices it is projected to grow at the rate of 8.7% in 2007-08. This new found growth has, of course, thrown many challenges at the policy makers:
a) The gap between the rich and the poor has been widening. The income/ consumption inequality as measured by Gini Index has increased to 30.5% in 2004 from 27.7% in 1994.2
b) Agriculture—the mainstay for 65% of the population—has been marginalised. There is an increasing apprehension among economists that even additional investment in agriculture to push its growth rate from the present 2.5% to 4% and thereby create additional employment, may at best add only 0.24 percentage points to the GDP, and this may not mean much for the already marginalized rural masses3, especially in the context of the declared goal of ‘inclusive growth’.
c) With the adoption of liberalisation, privatisation and globalisation models of growth, the hitherto practiced ‘social and development banking’ (which aimed at extending banking to un-banked centres to reach out to the disadvantaged groups) has been replaced by ‘commercially-oriented banking’, which obviously brought down the share of credit to priority sector lending, including agriculture.4
d) Under the plea of reining in fiscal profligacy, the State is actively withdrawing from its ‘developmental’ role—low investment in the development of both physical infrastructure and human capital. As a result, sustainability of current growth rate of 8% plus has become a question mark. “Maintaining growth rate at 9% will be a challenge and raising it to two digits will be an even greater one,” as the Finance Minister said in his Economic Survey Report—2007-08 presented to the Parliament.       Amongst these challenges, growth in agricultural output and eradication of poverty, have become matters of great concern for the policy makers. Indeed, the recent findings of the National Sample Survey Organisation’s (NSSO) 59th round reveals that over 48% of farmers are indebted (of which the largest percentage is in the size class of 0.01-1 ha) and nearly two-thirds of the farmers are frustrated with their vocation and are eager and ready to give up farming if they can secure an alternative job.5 This has only heightened the anxiety regarding the future of farming in the country. The increased concern was reflected in what the Prime Minister said recently: “If those who are better off do not act in a more socially responsible manner, our growth process may be at risk, our polity may become anarchic and our society may get further divided. We cannot afford these luxuries.” 
     Against this backdrop, the present study examines the current status of agriculture and poverty in the country, the scope and limitations of microfinance in reducing poverty, systemic changes required in credit delivery mechanism to give a boost to rural economy, and the need for defining a new role for public-private partnership in fostering an all-inclusive growth in the rural economy on a sustainable basis. The rest of the article is organised into following sections: Reforms and the Current Status of Agriculture; Poverty and Its Eradication: Current Status; Scope and Limitations of Microfinance in Poverty Eradication; Alternative Model for Effective Delivery of Rural Credit; the Role of Public-Private Partnership (PPP) in Ensuring Inclusive Growth; Conclusion.    
The National Commission on Farmers—headed by Dr. M. S. Swaminathan—in its fourth report submitted to the government in 2006 observed that agriculture is not only the means of earning livelihood for 65% of India’s population, but also a way of life. However, with the advent of economic and financial reforms, there emerged a trend of deceleration in agricultural growth from 3.2% between 1980-97 to around 2.0% thereafter.6 Indeed, the agricultural profitability has fallen by 14.2% through the decade of economic reforms, while the rate of growth of the agriculture and allied sectors decelerated during 1990s and continued into the post 2000 period.7 (Table 1)
In his address to the Parliament, the Finance Minister said that public investment in agriculture has declined on one hand, while on the other it could not attract private investment because of lower/unattractive returns. He felt that the 10th plan has limited success in creating additional irrigational facilities—hardly a little over 8 million ha could be brought under irrigation and only three-fourths of it could be utilised. He also opined that the agricultural extension system has generally not succeeded in reducing the gap between crop yields that could have been obtained through improved practices. The net result is: decline in the share of the agriculture sector’s capital formation in GDP from 2.2% in the late 1990s to 1.7% in 2004-05, which is a matter of concern.8
According to Surinder Sud9, factors such as heavy indebtedness, high rates of interest on loans borrowed from the informal sector, adverse weather, technology failure driven losses to crop production, stagnant crop productivity, growing dependence on cash inputs, escalating cultivation costs, increased competitiveness in free market, outmoded marketing systems, want of reliable technical advice and market intelligence, and lack of risk protection that are common to all regions of the country, are the causes for the current disquiet in agriculture. The report of the National Commission on Farmers submitted in 2006 identified the main problem of Indian agriculture as: “The average farm size is becoming smaller each year and the cost-risk-return structure of farming is becoming adverse, with the result farmers are getting increasingly indebted. Post-harvest infrastructure is generally poor, particularly in perishable commodities.”10 Similarly, absence of affordable crop insurance, and the non-offerability of rural integrated systems consisting of livestock and such other means that earlier constituted the farmers’ survival package against droughts, and other natural calamities any longer, made hedging of the crop failure risks difficult for the farmers.
    The approach paper on the 11th Five-Year Plan states that “The failure of the organised credit system in extending credit has led to excessive dependence on informal sources usually at exorbitant interest rates. This is at the root of farmer distress reflected in excessive indebtedness.” The NSSO’s All India Debt and Investment Survey, 2002, revealed that though the share of non- institutional sources of credit for agriculture has declined from 92.7% in 1951 to 30.6% in 1991, it has increased to 38.9% in 2002 mainly owing to increased share of the borrowings from moneylenders. Simultaneously, the share of institutional lending has gone up from 7.3% in 1951 to 66.3% in 1991, but declined to 61.1% by 2002.11 Though the data is not available for the subsequent years, the share of institutional credit might have gone up in the subsequent years with the thrust given in the recent past by the government. Nonetheless, concerns about inadequate access to credit in rural areas remain as detailed in Table 2.
     An Approach to the 11th Five-Year Plan—prepared by the National Development Council—states that to reverse the decelerating trend in agricultural growth there is a need for launching corrective policies which “must not only focus on the small and marginal farmers who continue to deserve special attention, but also on middle and large farmers who suffer from productivity stagnation arising from a variety of constraints.” The current plight of agriculture and the rural economy is well summed up when the Prime Minister said at the 2nd Agriculture Summit held on 18 October 2006: “When we review our agricultural situation, it is clear that there are four deficits we need to bridge. These deficits are: (i) the public investment and credit deficit; (ii) the infrastructure deficit; (iii) the market economy deficit; and (iv) the knowledge deficit. Taken together they are responsible for the development deficit in the agrarian and rural economy.”12 From these discussions two issues emerge: one, that all is not well with our agrarian economy, and two, easier and affordable access to financial services is the primary requirement for elevating the agrarian economy.
POVERTY: CURRENT STATUS    Traditionally, poverty is known as the lack of income necessary to satisfy basic needs, namely, food—defined on the basis of minimum calorie requirements— clothing, and shelter. Besides insufficient income, poverty includes reduced capabilities such as illiteracy, malnutrition, an abbreviated lifespan, poor maternal health, lack of access to services, and morbidity and death from preventable diseases. People often end up in poverty owing to ill health and insecurity; a variety of foreseeable burdens such as dowry/bride-wealth, and funeral obligations. Environmental hazards also hurt such vulnerable groups more significantly than others. Over and above that, poverty prevents people from exercising their rights and freedom to realise their full potential. It also hinders them from participating in the governance processes. 
     Ironically, the existing corpus of research on poverty in India mostly rests on estimating the number of poor. It is reported that at the beginning of new millennium there are 260 million people with income less than what is needed to access a consumption basket that defines the poverty line. There is however a sharp decline in the number: estimation of poverty based on the consumption expenditure survey revealed that there is sharp fall in it from 36% in 1993-94 to 26% in 1999-2000. Despite this encouraging reduction in the headcount under poverty, what is more disturbing is that a significant percent of households continue to suffer from chronic poverty. According to National Council for Applied Economic Research’s (NCAER) sample panel data set covering 3,139 households in 1970-71 and 1981-82 and 3,996 households between 1981-82 and 1998-99 revealed that 28.4% of sample households are chronically poor between 1970-71 and 1981-82 and 24.3% households remained poor between 1981-82 and 1998-99. And this raises the question whether our economic policies aimed at reducing poverty addressed the problem of chronic poverty at all.13 
     All this reveals that poverty transcends the conundrum of income or expenditure. It demands that it should be looked at from a wider perspective, for it has social, political and spatial connotations. Poverty thus assumes a three dimensional perspective, i.e., economic, human, and environmental. Poverty reduction, therefore, calls for not only growth in income, but also improvement of human capabilities and efficient use of resources. Poverty must therefore be eradicated in its totality for more than one reason: Longer the poverty persists, costlier will be its elimination. Prevalence of chronic poverty increases the risk of political instability and social conflict. Chronic poverty is a serious obstacle to meet the Millennium’s Development Goals.14 Incidentally, as Deepak Nayyar observed, the real failure of India throughout the second half of the 20th century, lay in its inability to transform growth into development. He therefore avers that India’s unfinished journey in development would not be complete so long as poverty, deprivation and exclusion persist.15
     To pursue the objectives of providing its citizens with the capabilities, opportunities and also to enable them to exercise their rights, rapid and sizable economic growth is a must. Though it is not an end in itself, growth sans employment is not sustainable either economically or politically; nor is it morally justifiable. That is why the concept of microfinance caught everyone’s attention as a sure fire path to self-employment. MICRO FINANCE AND POVERTY ERADICATION In India, microfinance has been defined by the task force, set up by National Bank for Agriculture and Rural Development (NABARD), as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban or urban areas for enabling them to raise their income levels and improve living standards.”16 Over the last few years, disbursal under microcredit has greatly expanded and yet it remained a minuscule player in the rural sector. These loans are essentially small in nature, with no collateral and are meant for income generation through market-based self-employment. They are mostly disbursed upon formation of borrower groups both among the rural and urban poor; disbursements to such groups are routed through Non-Government Organisations (NGOs); and each member of the group is used as a lever for recovering the loan from the other group member.
     Microcredit loans are essentially meant for self-employment projects. But these loans are sometimes used by the borrowers for consumption as well. Secondly, it is always difficult to differentiate a consumption loan from production loan, both on account of the fungibility of cash and the organic links between consumption and production of poverty stricken people. Nevertheless, the advocates of microcredit do consider it necessary that microcredit institutions encourage borrowers to make the transition from consumption loans to production loans, or loans for income-bearing projects.17 
     According to the NABARD’s annual report for 2005-06, there are 2.2 million  Self-Help Groups (SHGs) covering 32.98 million households and the total credit disbursed by these SHGs is Rs. 11,398 cr against the estimated annual demand of Rs. 1,00,000 cr. Reasons for such poor performance are many:
a) The “twin problems of non-viability and poor recovery performance” of existing rural credit institutions18 led to handing over of microlending in rural areas to NGOs. It is felt that by handing over activities such as assessment of credit needs, appraisal, disbursal, monitoring of repayment, etc. to NGOs, transaction costs can be reduced and thereby the cost of debt to the borrowers. But research has proved otherwise: the study of19 Chavan and Ramakumar revealed that the refinancing of the loan done by NABARD at 7.5% per annum has become 10 to 15% by the time the bank lends to NGOs and then to 12-24% by the time NGOs lend to SHGs and ultimately it rose to 24-36% for the ultimate borrower.
b) Even on the recovery front, the assumptions about loan recovery under microfinancing proved to be wrong by a study of the financial performance of Self-Employed Women’s Association (SEWA) bank, which revealed that overdues are a major area of concern for microfinance institutions.20
c) The NGO-controlled microcredit projects could not afford to spread out and reach the rural poor across the length and breadth of the vast country.
d) These institutions being responsible only to their donors, are posing the problem of accountability to the public.
     In all, as Madhura Swaminathan observed, NGO-controlled microcredit organisations cannot be relied upon to eliminate poverty. Therefore, the banking system must resume the role of being the main conduit of credit.21
ALTERNATIVE MODEL FOR BETTER DELIVERY OF RURAL CREDIT As discussed in the preceding paragraphs, the disbursement of agricultural loans, including loans under microfinance, looks gloomy in relation to the known demand. The plight of the farming community is well reflected in the landmark observation Prime Minister made at the 2nd Agriculture Summit on 18 October 2006: “… we need more thinking on the credit front. While the financial system should do more for the credit needs of farmers, we need to raise some questions. What do farmers need—a lower rate of interest or reliable access to credit at reasonable rates? Is our existing institutional framework adequate for meeting the requirements of our farmers who are a diverse lot? Do we need to create new institutional structures such as SHGs, microfinance institutions, etc., to provide improved and reliable access to credit? Or do we need to bring in moneylenders under some form of regulation? It is necessary that we find answers to these questions in the near future.”22 
     Though these apt questions look simple, they call for ‘out-of-the-box’ answers.23 It is, of course, a matter of common sense that what a farmer essentially needs to enhance his farm-productivity is a reliable access to timely credit. In his anxiety to catch up with the season, he would not mind costlier credit. Interestingly, it is found that the policy-driven Indian rural bank branch expansion programme significantly reduced rural poverty, while of course leaving urban poverty unaffected.24
     The study, carried out by Robin Burgess and Rohini Pande on the impact of rural branch expansion programme undertaken by the RBI between 1977-1990 on the eradication of poverty and output using panel data for the 16 major Indian states over the period 1961-2000, revealed that the rural branch network expansion has increased secondary and tertiary sector output besides increasing non-agricultural employment, suggesting “a need to reconsider rural banking as a mechanism for attacking poverty”. 
     Encouraged by these arguments, it is proposed that a new pan India bank for extending rural credit may be constituted. The existing rural branches of all PSBs numbering about 30,633 may be hived-off from the PSBs and handed over to a newly constituted bank, along with the branch network of RRBs to start lending operations with no loss of time. The PSBs are to be compensated for transferring the rural branches to the proposed new bank with redeemable bonds—of course, after carrying due valuations. Thereafter, the existing PSBs may be relieved from the responsibility of rural lending. They shall however be asked to contribute to the capital of the proposed pan India bank at a fixed percentage of their credit portfolio—to be worked out in consultation with the Reserve Bank of India—on an annual basis just as today private banks are asked to place certain prescribed amount of capital in rural bonds with the NABARD for the shortfall in their achieving the set targets under priority sector lending or, as a token of their ‘corporate social responsibility’. The government has to provide the initial capital to the new bank through budgetary provision just as it did in the case of recent waiver of agricultural loans. The new bank shall also be permitted to mobilize deposits not only to generate sufficient working funds for its operations, but also provide a means for rural clientele to save.
     The proposition of a pan India bank with a mandate to undertake rural lending essentially rests on the argument:
a) With the advent of structural changes that the government has brought in as a sequel to the 1991 economic crisis, there has been drastic fall in rural credit of the banking system—the share of rural credit that grew from 3.5% to 15% between 1971 to 1991 has fallen to 11% in 1998.25
b) There is higher exclusion of adult population from rural side in credit markets— an average of 9.5% is covered under credit as against 14% from urban population—that too, when out of 203 million households, 147 million are in rural areas.26
c) Borrowers faced high transaction costs to secure subsidised loans, making the ultimate cost as high as 22 to 33%27, which theoretically means an implicit ‘adverse selection’ in credit appraisal process, particularly, when banks are driven by profit motive, as is the case under today’s Liberalisation, Privatisation, and Globalisation regime.
d) The liberalisation processes have created another problem: under the prudential and capital adequacy norms, banks are required to mark the investments to market, which have made banks more risk-averse. This, coupled with the rise in interest rates on government securities, which is again due to reforms, banks’ investment in government securities has increased at the cost of credit to the private sector.28
e) In the world of imperfect information, as Stiglitz and Weiss29 have shown, banks always ration credit, even in equilibrium. This is why, credit markets are, more often than not, perceived as supply-determined. 
     We have seen this happening recently with the State Bank of India, the country’s biggest bank, when it banned sanctioning of farm loans30—owing to the fact that the default rate on farm equipment loans has increased to 17% from 10% a year ago—for purchase of tractors and other farm equipment. It is, of course, a different matter that the same was withdrawn within a couple of days, but at the subtle intervention of its largest shareholder, the Government of India.
     The policy implication of this theory is that governments can use the banking system as an efficient tool of economic policy.31 The State, by creating a nationwide bank for rural lending with necessary capital on the lines suggested, can create new purchasing power among the rural people that is left out from the current growth process.  
     Indeed, it is with such State intervention, Japan, from the 1960s to the 1980s, could create the ‘miracle economy’ with an overall real economic growth of a 10% average in the 1960s, a 5% average in the 1970s and a 4% average in the 1980s.32 According to Johnson33, Japan, by adopting ‘plan rational’— “… pursued[ing] not blind ideological goals but enhanced economic competitiveness”34—as opposed to ‘market rational’ and the Soviet-type command economy’s ‘plan ideological’, augmented via ‘soft authoritarian’ state intervention, market rationality in the long-term by reducing risk and uncertainty35 through augmenting the supply of investible resources, spreading or socialising long-term investment risks, and steering the allocation of investments by combining government and entrepreneurial preferences. This has been variously described as ‘governed markets’36 and ‘disciplined markets’37, where the key is a “synergistic connection between a public system and a mostly market system, the outputs of each becoming inputs for the other”. It is this combination of incentives—“channeling savings away from consumption and other non-productive investment options to the manufacturing sector and by regulating interest rates”—and market discipline that has been mostly identified as responsible for the success of the East Asian economies.38 Such a State-directed developmental model can be developed mutatis mutandis and implemented for ensuring inclusive growth in our villages/for rural development in the form of an exclusive pan Indian bank for rural lending. Against this backdrop, creation of an exclusive bank—as a policy tool to make capital available to the rural population through a professionally managed bank with due capital-support for its success from the government—will go a long way in ensuring inclusive growth. 
     An obvious question that may arise here is: How a pan India bank meant for rural credit delivery can succeed where the earlier floated RRBs with similar exclusiveness of rural lending and PSBs with guidelines for directed lending have failed in delivering the results? Prima facie the concept of pan India bank may sound akin to RRBs, but there is a vast difference between the two. The pan India bank, if created, would be a nationwide bank with a large branch network of more than 40,000 branches and funded by the Central Government with the sole intention to use it as a national policy-tool to inject purchasing power among those living in rural areas with little or no purchasing power. As against this, the RRBs operated with limited funding, that too, from the sponsoring bank, which in itself is not all that happy with the concept of directed lending, and within a predefined limited geography with ceiling on credit limits. The reasons for their failure are thus obvious. Coming to PSBs, they initially operated with enthusiasm, but once profit became the central element under LPG, they could not cater to the full requirements. Secondly, this is not their main business but only a part of a bigger whole that is mainly urban-focused. The result is it could not build a culture that is required for effective rural credit delivery. As against these realities, the likely success of the proposed pan India bank for delivering rural credit is backed solidly by similar experiences, though, elsewhere: one, the pivotal role played by the Development Bank of Japan in successfully industrialising the war-ravaged Japan in 1950s and 1960s by offering “low interest loans to sectors designed for growth”39, which paved the way for the much acclaimed ‘miracle-economy’ of Japan; and two, the success of HDFC— a bank established with the sole objective of providing housing loans in the urban India.
     In the early 1990s when India made an attempt to integrate its economy with that of the globe, a number of Indian business houses came together—whom the media dubbed as “Bombay Club”—in opposing the opening up of our economy.40 They questioned the very liberalisation as it would, in their opinion, destroy India’s indigenous industry. The reforms have, however, taken deep roots and today, though not surprisingly, we are witnessing a tremendous element of “can do” feeling among these very industrial houses which are incidentally on an acquisition spree in the global markets. On any count, there is no reason why we should doubt the success of the proposed pan India bank in delivering the intended objectives. 
     There is yet another apprehension among the pundits that credit delivery being a mere financial service, its impact on growth in agriculture solely rests on a host of factors such as the philosophy that governs the delivery of credit, the extent to which it is dovetailed with the needs of the intended beneficiaries, the style of relationships that govern its delivery to the intended users, and the calibre and commitment of the people who are responsible to deliver it, which incidentally, is the most elusive of all our developmental inputs.41 To effectively counter these realities, an altogether new organisation alone can develop the required paradigm shift in the organisational culture that can address the issues that have a direct bearing on agricultural productivity in the country as also eradication of poverty on a sustainable basis. As a part of this agenda the bank must42: a) Create or expand the financial markets without distorting product or factorprices;
b) Evolve a lending model that facilitates speedy reach to the farmers and other rural clientele with a minimum transaction cost so that interest rates can be kept low;
c) Design cost-effective methods to scale up the service delivery mechanism both horizontally and vertically;
d) Minimise cost-prone paperwork to make credit delivery more friendly to the farmers; develop systems to increase volumes and thereby raise net margins;
e) Define the positive role that village level institutions like Panchayat Raj, Cooperative Societies, etc., could play in credit delivery and more importantly, recovery in association with the concerned government agencies and secure conscious acceptance for compliance thereof;
f) Define the role of government in creating a conducive atmosphere for smooth flow of rural credit and engender sustainable credit culture;
g) Define fair banking risks under various kinds of lending to enhance the scope for timely credit decisions at the branch level;
h) Leverage IT to deliver financial services faster and at cheaper price; and
i) Design a mechanism to convert bankers from a credit supplier to a friend, philosopher and guide for rural folk—people who live in abject poverty having no knowledge of scientific techniques of cultivation to improve productivity of the land and in turn their economic lot.
     All along, credit delivery to rural masses has been dubbed as too expensive for it involves servicing large number of small loans. It is in this context that IT emerges as a best tool to answer this conundrum and deliver rural credit at a lesser cost, and speedily too, by positing itself as a “go-between”43 to service the customers. Taking advantage of the recent approval granted by the Reserve Bank to appoint Business Correspondents (BCs), the newly constituted bank may, using IT tools, reach rural India by creating a banking outpost in every village to deliver credit on the following lines44:
a) A ‘cluster-head’ branch may collect the details of every farmer of each village through the BCs.
b) The branch can then verify the data of each villager and open savings bank accounts after capturing relevant information such as photograph, fingerprints/ signature and encrypt it in the smart card.
c) Then hand over the smart card to the customer, which can then be activated by the BCs through fingerprint identification/signature.
d) The customer can then operate his account through the terminal managed by the BCs in the respective customer’s village.
e) All these village level terminals are then integrated with the Central Processor located in the cluster-head branch. Each cluster-head branch can service 25 to 30 villages.
f) As a sequel to this, the cluster-head branch shall maintain a dossier for each customer consisting of his credit information, such as landholding, cropping pattern, credit needs and history of loan repayment, which are required to calculate the credit score.
g) This data is annually updated to arrive at fresh credit score based on which credit pricing is done. Such updates are furnished by the customer himself by feeding it through the menu-driven touch-screen device, which in turn shall be captured by the central processor located in the cluster-head branch.
h) Based on such updated credit history, the cluster head branch shall sanction credit limit online for the next agricultural year and make it available through the BCs.
i) Repayments and disbursals can also be arranged through the BCs. Incidentally, farmers may also be encouraged to use their smart card as debit card for affecting purchases such as seeds, fertilizers and pesticides, from merchant establishments.
     With the help of IT solutions and appointment of BCs, the cost of delivery of rural credit can substantially be brought down. Simultaneously, it can also be delivered speedily. Such mechanism also facilitates effective monitoring of the credit. But, for that to happen, it is essential that the proposed institute nurture a culture where employees work with a social consciousness—operates with a feeling of discomfort about the plight of people in discomfort. 
     Creation of such a new bank relieves the PSBs from the current duress of the so-called Non-Performing Assets (NPAs) under agriculture credit and thus keeps their much sought after ‘commercial outlook’ intact—fit and ready to face the  anticipated competition from the foreign banks from 1 April 2009, when financial services are supposed to be thrown open to the global players. The PSBs can stay focused on ‘maximising stakeholders’ returns’ and in the process benefit the highest shareholder, the Government of India, with good returns in the form of dividend income. This dividend income can be used to fund the ongoing lending activities of the proposed agricultural bank. Such an institutional set-up enables PSBs become strong and healthy, while a single designated bank meant for delivering rural credit can take care of the aspirations of the rural clientele. This ensures the healthiness of the country’s financial system, which is a must in a globalised economy.
     The crowning argument favoring the necessity for creating such a pan India bank exclusively for the delivery of rural credit emerges from the findings of the study of Robin Burgess and Rohini Pande on Indian banks, which states: “One clear thing that we do learn from this paper is that coercion is needed to expand formal credit into backward rural areas and to force banks to lend to poorer individuals.” In the common parlance of a lending banker, a poor farmer with no assets is a high credit risk, and hence the bank charges him higher interest rate. This hardly enables him to generate any surplus over consumption. And with continued deprivation of capital supply, the farmer remains a bad bet for the lending bank forever. That is where banks, just as SBI recently did, find ways and means to ration credit disbursal and that is where ‘coercion’ to lend becomes a must. Now the question is: Are we to coerce so many banks or would it be effective if a new bank is created with a mandate to exclusively cater to the needs of rural clientele for financial services keeping well-defined checks and balances in place? The answer is obvious: one bank with no ‘legacy problem’ and with clear directives from the owner about its objectives and its ‘exclusivity’ can be effectively monitored and made to deliver the intended results better. All that the government needs to do is: one, to fund it with sufficient capital; two, allow it to operate professionally— just as the Japan Development Bank, established in 1951 by Japan’s Ministry of International Trade and Industry (MITI) that is described as instrumental in Japan’s post-war economic recovery, did perform—with least interference; and three, keep compensating it from the interest losses, if any, suffered by virtue of offering credit at affordable rates, till it is able to sustain on its own—all in the interest of social gains.  
PUBLIC-PRIVATE PARTNERSHIP IN POVERTY ERADICATION   It is also worth remembering here that access to finance alone cannot enable the poor to develop themselves and become self-supporting. For instance, poor people suffering from malnourishment, or illness or lack of skills cannot be a suitable target for microfinance institutions. The reason is obvious: intervention in the form of injecting capital is not an efficient solution to increase the income level of an unhealthy individual for he cannot undertake the work. That is why the government has to step in with an appropriate mix of welfare measures. And in that context, the fear of fiscal profligacy should not deter the well-meaning government from implementing the dictates of welfare economics. To minimize fiscal profligacy, the government should invite participation from the corporate world by formulating suitable welfare schemes for raising the human development index levels. Here corporates too, in their own interest of creating additional buying power in the domestic market, must volunteer to engage themselves in such welfare provisions under today’s buzzword—‘corporate social responsibility’.
     One of the identified enabler for escape from poverty is education. The Childhood Poverty Research and Policy Centre (CHIP) has proposed four policy initiatives for ensuring that poverty transfers are interrupted, life course and intergenerational poverty cycles are broken: (a) universal education for at least 10 years; (b) preventive and curative health services for all; (c) an emphasis on underfive and maternal and adolescent nutrition; and (d) social protection to ensure that the previous three are happening and thereby enhance their strategies for living. The outcome of education needs hardly to be stressed here: it enhances health consciousness and adoption of hygienic behaviour. Education of women minimises mortality rate among children, and it ensures low fertility rate and imparts traditional skills, which is the path to increased wages and better livelihood for the whole family.45 In the light of these observations, it becomes more essential for the government to plan such public services, which enable poverty-stricken people to take advantage of the synergies between nutrition, education and family planning46 and get out of poverty. Corporates can associate themselves in implementing welfare measures that make people more capable of taking up marketable ventures and in the process move out of the vicious cycle of poverty, ill health and deprivation once for all. 
     There is yet another area where corporates can certainly play a great role. In their working paper, “The Extent of the Market and Stages of Agricultural Specialization,47 M. Shahe Emran and Forhad Shilpi of the World Bank argue that there is nonlinearity in the relationship between crop specialisation in a village economy and the size of the urban market relevant for that village. Their study revealed that initially the portfolio of crops in a village economy gets diversified as the reach of the market increases. But once the market size reaches a threshold, the production structure gets specialised. Hence the authors of the study highlight the importance of improving farmers’ access to larger markets through investment in transport infrastructure and eradication of barriers for trading. In our context, both these constraints—transportation and geographical barriers—are playing havoc with our agricultural productivity. It is only by eliminating the restrictions on cross-border trade among the states we can widen the market for agricultural commodities. Secondly, the government should encourage private participation in creating transport infrastructure, and also creating necessary logistics for widening the farmers’ markets. Put together, these two measures shall ensure specialisation in cultivation of different crops, which ultimately means higher economic growth. Similarly, private participation must be encouraged in activities that enhance rural growth such as aquifer management and recharge, better drainage systems, watershed management, training of farmers in water harvesting and other scientific practices which have a direct bearing on the overall farm productivity.
     As is being witnessed today, corporate social responsibility has become the buzzword. Many industrial houses are now coming forward to undertake social projects meant for the development of the people living in periphery of today’s development. Taking advantage of this new orientation of corporates, the proposed pan India bank can work as a conduit between corporates and villages in bringing them together for executing developmental projects that would benefit villagers directly and corporates either directly or indirectly. To cite an example, the bank can invite the corporates that are spanning across the country with their retail outlets to promote ‘contract farming’ which is a win-win proposition both for farmers and corporates. Simultaneously, the bank can invite corporates to undertake such infrastructure development in the villages, which will have a direct bearing on their supply chain management. In a broader sense, the “livelihood training for one lakh rural youth”48 that the AP state government is planning to offer by entering into a memorandum of understanding with 13 firms is the kind of collaboration that could emerge under the concept of private-public partnership benefiting the rural population.
  CONCLUSION   It is often said that much of our failure as a nation in improving our basic social indicators like literacy, mortality and poverty rates squarely rests in our inability to transform our growth into development. Such transformation might have improved the living conditions of ordinary people. We cannot claim to have achieved economic growth till such time that we eradicate deprivation, poverty, and exclusion. Time has come for us to focus our attention on the hitherto excluded population from the phenomenal economic growth that the country has been enjoying in recent years and institutionalise the welfare practices that can pave the way for inclusive growth.
     It hardly needs to be stressed here that in the absence of market opportunities, people from below poverty line look to the State for their survival. The State cannot abdicate its responsibility of providing its citizens with the capabilities, opportunities and rights they need to choose a decent life and for that to happen, the State must first ensure economic growth. Then, it must build such institutions— economic, social and political—which can enhance the effectiveness of the State in offering them protection. As a part of this exercise, the State must create a new financial institution—a Pan India Bank—and fund it sufficiently to enable it to carry out the mandated programme of delivering timely rural credit in tune with a self-sustainable model. Such a set-up alone can better subserve the national priorities such as rapid growth of agriculture, and eradication of poverty. The State has to take the “direct responsibility” of redistribution of resources among the capital-starved farming community for social gains—all in the interest of economic development of the country. Here, one may tend to look for an easy option: merging the so hived-off rural branch network of PSBs with the existing NABARD, for it speeds up the whole process. But there is an embedded risk: its legacy will prevail upon the functioning of the new outfit, which is not in the interest of the clientele to be served.
     It may be premature to suggest that creation of such a bank for distribution of rural credit with the sole objective of improving agrarian economy and eradication of poverty is the optimal policy. But ‘inclusive growth’ calls for such ‘out-of-box’ solutions. In any case, such an institution is sure to address the economic problems of the folks hitherto left out from the growth prospects that the other betterendowed sections of the society are enjoying today, on a sustainable basis rather than the short-term measures such as ‘loan-waivers’. ‘Pro-growth’ and ‘pro-business orientation’ of the government to ensure economic growth should not mean leaving the others “out in the cold”. For, a narrow commitment of the government to ‘growth’ alone distorts the quality of democracy by creating politico-economic turbulence and conflicts. The suicidal deaths of farmers who caught in debt trap— particularly those who borrowed money for cultivation from local moneylenders— from across the country is a pointer in this direction.
     There is yet another not-so obvious reason as to why growth in agrarian economy is essential: even to sustain the current growth rate in general requires increased demand for industrial output and services, which has to come from the growing purchasing power of rural population. Secondly, agricultural growth is essential for providing food security and also to keep inflation under control, which is again a must for stable and sustained growth. Thirdly, higher growth in agriculture usually leads to more savings, which can in turn be used for financing additional growth. Fourthly, growth in agrarian economy reduces migration of labour from countryside to urban segments, which eases pressure on urban infrastructure. Importantly, our growth being highly ‘knowledge-centric, it calls for essentially skilled labour, and thus even rural labour migrated to urban centres cannot find employment easily. Even otherwise, as Gandhi said49: “The economics that disregard moral and sentimental considerations are like waxworks that, being lifelike still lack the life of the living flesh”; there is a need for approximation between justice and fairness and morality. There are thus several reasons why ‘inclusive growth’ is a must.
     Therefore, to raise the allocative efficiency of investment and resources across different segments of the economy, an effective delivery system of credit for agriculture, micro, and small and medium enterprises is a must, besides investment in development of agricultural and social infrastructure. And for this to materialize —to ensure easier and affordable access to financial services to farmers—creation of a new bank that is well-funded by the government with totally new culture of helping the rural poor emerges as an important constituent of our search for an alternative model of development for India.        
 - GRK Murty 
1.  Atul Kohli, “Politics of Economic Growth in India, 1980-2005 Part I: The 1980s,” Economic and Political Weekly,Vol. 41 no. 13 (1-7 April 2006), pp.1251-1259.
2.  Chetan Ahya, “Globalization, Capitalism and Inequality,” The Economic Times, 9 July 2007.
3.  Arvind Panagariya, “Agriculture, the Final Frontier?” The Economic Times, 30 July 2007.
4.  Madhura Swaminathan, “The Microcredit Alternative?” Economic and Political Weekly, Vol. 42 no. 13 (31 March-06 April 2007), pp.1171-1175.
5.  R.S. Deshpande and Nagesh Prabhu, “Farmer’s Distress—Proof Beyond Question,” Economic and Political Weekly, Vol. 40 nos. 44 and 45 (29 October-04 November 2005), pp.4663-4665.
6.  Y. V. Reddy, “Rural Banking: Review and Prospects,” the first Samarajit Ray Memorial Lecture delivered by Dr. Y. V. Reddy, Governor, Reserve Bank of India, organised by the Andhra Pradesh Mahila Abhivruddhi Society, Hyderabad, on 16 December 2006.
7.  Dr. Y. K. Alagh, Chancellor, Nagaland University and Trustee of the Rajiv Gandhi Foundation, 18th Jawahar Lal Nehru Memorial IFFCO Lecture, Indian Farmers Fertiliser Cooperative Limited, New Delhi, on 16 November 2005.
8.  Economic Survey, 2007-2008 (New Delhi: Ministry of Finance, Government of India, 2008).
9.   Surinder Sud, “Farmers’ Suicide Cases: Emerging Issues,” Margin, Vol. 38 no. 3 (1 April 2006), pp.1-8.
10. As quoted by Sud in “Farmers’ Suicide Cases: Emerging Issues”.
11. As quoted by Usha Thorat, “Inclusive Growth – The Role of Banks in Emerging Economies,” Independent Commemoration Lecture, 2008 at the Central Bank of Sri Lanka, Colombo, 28 February 2008.
12. As quoted by Dr. Y. V. Reddy, Governor, RBI, in the first Smarajit Ray Memorial Lecture—“Rural Banking: Review and Prospects”—organised by the Andhra Pradesh Mahila Abhivruddhi Society, Hyderabad on 16 December 2006.
13. Amita Shah, Aasha Kapur Mehta, and Shashanka Bhide, “Chronic Poverty in India: Evidence and Policy Imperatives,” Margin, Vol. 38 no. 4 (July-September 2006) and Vol. 39 no. 1 (October-December 2006), pp.1-6.
14. Tim Braunholtz (2006), “Why Bother with Chronic Poverty?” CPRC Policy Brief. (As quoted in Andrew Shepherd, Tim Braunholtz and Lucy Scott, “Policies against Chronic Poverty: Policy Implications of a Dynamic Approach to Understanding Poverty.”)
15. Deepak Nayyar, “Economic Growth in Independent India: Lumbering Elephant or Running Tiger?” Economic and Political Weekly, Vol. 41 no. 15 (15-21 April 2006), pp.1451-1458.
16. NABARD, 2000, “Summary and Recommendations,” report by the task force on supportive policy and regulatory framework for microfinance in India, available at
17. C. Rangarajan, “Role of Non-Governmental Organisations in Rural Credit Delivery System,” Reserve Bank of India Bulletin (Mumbai: Reserve Bank of India, 1997).
18. C. Rangarajan, “Rural India, the Role of Credit,” Reserve Bank of India Bulletin (Mumbai: Reserve Bank of India, 1996).
19. P. Chavan and R. Ramakumar, “Interest Rates on Microcredit” in V. K. Ramachandran and Madhura Swaminathan, eds. Financial Liberalization and Rural Credit in India (New Delhi: Tulika Booka, 2005).
20. S. Ghosh, “Design Issues in Microcredit,” available at, 2001.
21. Swaminathan, “The Microcredit Alternative?” pp.1171-1175.
22. As quoted by Dr. Y. V. Reddy, Governor, RBI, in the first Smarajit Ray Memorial Lecture —”RuralBanking: Review and Prospects”—organised by the Andhra Pradesh Mahila Abhivruddhi Society, Hyderabad on 16 December 2006.
23. G. R. K. Murty and Pradeepta Samanta, “Microfinance: A New Model for Effective Delivery of Credit to Reduce Poverty.” Paper presented at 60th All India Commerce Conference held in Hyderabad on 27-29 December 2007.
24. Robin Burgess and Rohini Pande, “Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment,” Discussion Paper No. DEDPS/40 (UK: The Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics and Political Science, 2003).
25. Sa-Dhan Microfinance Resource Centre (2004), “Indian Experience of Microfinance: A Sustainable Banking Solution to the Poor (as quoted in P. T. Jayasheela Dinesha and V. Basil Hans, Financial Inclusion and Microfinance in India: An Overview,
26. Jayasheela Dinesha and Basil Hans, Financial Inclusion and Microfinance in India: An Overview,
27. Jayasheela Dinesha and Basil Hans, Financial Inclusion and Microfinance in India: An Overview
28. R. A. Werner, “Indian Macroeconomic Management: At the Crossroads between Government and Markets,” Rising to the Challenge in Asia: A Study of Financial Markets, Vol. 5, India (Manila: Asian Development Bank, 2000).
29. As quoted in Werner, “Indian Macroeconomic Management: At the Crossroads between Government and Markets”.
30. “SBI Suspends Loans for Buying Tractors, Farm Equipment,” Business Line, 19 May 2008.
31. Vijay Joshi and IMD Little, India’s Economic Reforms 1991-2001 (Oxford: Clarendon Press, 1996)p.111. As quoted in R. A. Werner, “Indian Macroeconomic Management: At the Crossroads between Government and Markets,” Rising to the Challenge in Asia: A Study of Financial Markets, Vol. 5, India (Manila: Asian Development Bank, 2000).
33. Chalmers Johnson, “The Developmental State: Odyssey of a Concept,” in Meredith Woo-Cumings, ed. The Developmental State (Ithaca, NY: Cornell University Press, 1999).
34.  T. J. Pempel, “The Developmental Regime in the Changing World Economy,” in Meredith Woo-Cumings, ed. The Developmental State (Ithaca, NY: Cornell University Press, 1999).
35. Johnson 1987: 141, as cited in P. M. Lubeck , “Malaysian Industrialisation, Ethnic Division and the NIC Model: The Limits of Replication,” in R. P. Applebaum and Jeffrey Henderson, eds. States and Development in the Asian Pacific Rim (London: Sage, 1990).
36. Robert Wade, Governing the Market (Princeton, NJ: Princeton University Press, 1990).
37. Alice Amsden, Asia’s Next Giant: South Korea and Late Industrialization (Oxford: Oxford University Press, 1989).
38. H. J. Cheng, “Guarding the Commanding Heights: The State as Banker in Taiwan,” in Stephan Haggard, C. H. Lee and Sylvia Maxfield, eds. The Politics of Finance in Developing Countries (Ithaca, NY: Cornell University Press, 1993).
39. Keizai Koho Sentaa, Japan: An International Comparison, p.5 (Tokyo: Keizai Koho Sentaa, 1983).
40. Stanley Kochanek, “Liberalisation and Business Lobbying in India,” Journal of Commonwealth and Comparative Politics, Vol. 34 no. 3, November 1996, pp.155-73.
41. Naila Kabeer, “Is Microfinance a ‘Magic Bullet’ for Women’s Empowerment? Analysis of Findings from South Asia,” Economic and Political Weekly, Vol. 40 nos. 44 and 45 (29 October-04 November 2005), pp.4709-4718.
42. G. R. K. Murty, “Rural Credit: A Retrospective and Prospective View,” The Teller, Vol. 27 no. 2, pp. 21-22.
43. G. R. K. Murty, “Banking in the Dotcom World: A Preview,” IBA Bulletin, March 2000, pp.84-90.
44. RBI Report on Trend and Progress of Banking in India, 2006-07, p.104.


Anonymous said...

Thanks: V Basil Hans

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